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Three lessons from the downfall of BWX
This time last year, BWX Limited (ASX: BWX) was a small-cap fundie favourite, growing a portfolio of skincare brands including Sukin, Nourished Life, Andalou Naturals, Flora & Fauna and Mineral Fusion.
Today, it’s a pariah. After announcing a second earnings downgrade in as many months, BWX has been forced to raise capital at a steep discount to reduce debt. Subsequently, the share price is trading 84 per cent lower in 2022.
Where did it so wrong? Here are three lessons every investor can take away from the downfall of BWX.
Always check the balance sheet
If you were to point to one single vulnerability at BWX, it would be the balance sheet. On December 31, it had net debt of $26.4 million. However, that’s before accounting for a tax liability of $43.9 million on the $93.1 million it would need to payout in 2024 should Go-To founders exercise their put option. All up, these liabilities outweighed cash by more than four times.
This might be acceptable if the business had strong cash generation. But BWX recorded just $2.3 million in operating cash flow in the first half of FY22. With inventory needing to ramp-up as a new manufacturing facility came online, it was unlikely the second half would be much better. In fact, judging by the net debt balance of $82 million announced on Tuesday, BWX burnt through $56 million of cash in the second half.
Shareholders will currently point out that management failed to flag balance sheet stress at the half-year result in February and investor day in May. But it was apparent that should the operating business underperform, BWX had little wiggle room.
Where did the CEO go?
The next key lesson is to be critical of changes in leadership. In January, BWX announced the transition of the CEO role from Dave Fenlon to chief operating officer Rory Gration. It was odd timing, given the business recently closed the acquisition of Go–To and was about to open its new production site. If anything, this was as good a time as any to be CEO. Nonetheless, Fenlon had led the company for three years and agreed to stay on as a director.
But in late March, he reneged on joining the board, citing increasing outside commitments. In hindsight, this was a red flag that needed further explanation. What caused Fenlon to go from CEO to not having sufficient time to attend a monthly board meeting in under three months? Per his LinkedIn, he joined a new company as CEO in March. If he was going to leave the board after finding a new position, this should have been forewarned. A cynic would say Fenton exited just as everything began falling apart.
Acquisition alarm bells
The third lesson is the danger of an acquisition-led strategy. Analysis by Aoris Investment Management found an average acquisition failure rate of 59 per cent. While it’s difficult to declare BWX acquisitions as failures, it’s not looking good. Of the six brands BWX owns, Sukin is the only one it’s developed internally. Go-To already looks like a flop given it didn’t even get a mention during Tuesday’s presentation, just seven months after BWX took a 50.1 per cent stake. Management is shopping around the commerce sites citing them as non-core. Reviews from BWX employees paint a dire picture, particularly in the North American division where Mineral Fusion and Andalou are prominent. The simple conclusion is that management is spread thin across six brands in multiple regions. It’s then little surprise that Gration flagged significant write-downs in the full-year result in August.
In hindsight, everything is much clearer. But the reality it’s easy to forget. For suffering shareholders, this will be a valuable learning experience. For the onlookers, you’ve been warned.
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